Getting sick and paying for it

In certain situations, Americans who become chronically ill have to pay higher rates to continue their health insurance coverage. Indeed, although the majority of Americans are insured, hardly anyone is fully protected against the risk that their next insurance policy will cost considerably more than their current one.Insurance, Health

Accounting for non-annuitization

Why don't people buy annuities? Several explanations have been provided by the previous literature: large fraction of preannuitized wealth in retirees' portfolios; adverse selection; bequest motives; and medical expense uncertainty. This paper uses a quantitative model to assess the importance of these impediments to annuitization and also studies three newer explanations: government safety net in terms of means-tested transfers; illiquidity of housing wealth; and restrictions on minimum amount of investment in annuities. This paper shows that quantitatively the last three explanations play a big role in reducing annuity demand. The minimum consumption floor turns out to be important to explain the lack of annuitization, especially for people in lower income quintiles, who are well insured by this provision. The minimum annuity purchase requirement involves big upfront investment and is binding for many, especially if housing wealth cannot be easily annuitized. Among the traditional explanations, preannuitized wealth has the largest quantitative contribution to the annuity puzzle.Accounting

Work Incentives of Medicaid Beneficiaries and the Role of Asset Testing

Should asset testing be used in means-tested programs? These programs target low-income people, but low income can result not only from low productivity but also from low labor supply. We aim to show that in the asymmetric information environment, there is a positive role for asset testing. We focus on Medicaid, one of the largest means-tested programs in the US, and we ask two questions: 1) Does Medicaid distort work incentives? 2) Can asset testing improve the insurance-incentives trade-off of Medicaid? Our tool is a general equilibrium model with heterogeneous agents that matches many important features of the data. We find that 23% of Medicaid enrollees do not work in order to be eligible. These distortions are costly: if individuals’ productivity was observable and could be used to determine Medicaid eligibility, this results in substantial ex-ante welfare gains. When productivity is unobservable, asset testing is effective in eliminating labor supply distortions, but to minimize saving distortions, asset limits should be different for workers and non-workers. This work-dependent asset testing can produce welfare gains close to the case of observable productivity.JEL Classification Codes: D52, D91, E21, H53, I13, I18This work is supported by JSPS KAKENHI Grant Number 15K03505 and GRIPS’ Research Project Grant.http://www.grips.ac.jp/list/jp/facultyinfo/porapakkarm-ponpoje

Reducing Medical Spending of the Publicly Insured: The Case for a Cash-out Option

Individuals\u27 medical spending has both necessary and discretionary components which are not, however, separately observable. This paper studies ways to improve upon existing public health insurance policies by using a framework where both the discretionary and necessary components of medical spending are explicitly modeled. First, using a simple theoretical framework the paper shows that the key to reducing discretionary medical spending is to introduce a trade-off between non-medical and medical consumption. Next, using a rich quantitative life-cycle model the paper shows that this trade-off can be successfully implemented by introducing an option to substitute public health insurance with cash transfers.JEL Classification Codes: D52, D91, E21, H53, I13, I18http://www.grips.ac.jp/list/jp/facultyinfo/porapakkarm-ponpoje

Welfare costs of reclassification risk in the health insurance market

We assess the quantitative importance of reclassification risk in the US health insurance market. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. Thus, a change in the health status can lead to a significant change in the health insurance premium. We measure welfare gains from introducing explicit insurance against this risk in the form of guaranteed renewable health insurance contracts. We find that in the current institutional environment individuals are well-sheltered against reclassification risk and they only moderately gain from having access to these contracts. More specifically, we show that employer-sponsored health insurance and public means-tested transfers play an important role in providing implicit insurance against reclassification risk. If these institutions are removed, the average welfare gains from having access to guaranteed renewable contracts exceed 4% of the annual consumption.JEL Classification Codes: D52, D58, D91, G22, I11The authors acknowledge financial support from the Research and Development Administration Office at the University of Macau.http://www.grips.ac.jp/list/jp/facultyinfo/porapakkarm-ponpoje

Saving Motives over the Life-Cycle

A major challenge in the study of saving behavior is how to disentangle different motives for saving. We approach this question in the context of an entire life-cycle model. Specifically, we identify the importance of different saving motives by simultaneously accounting for wealth accumulation during working period, wealth decumulation during retirement, and labor supply behavior. We show that exploiting all of these data features can sharpen our identification, thus complementing previous studies that focus only on wealth accumulation or decumulation. We calibrate our model using several micro datasets and use the estimated model to evaluate the contribution of life-cycle, bequest, and precautionary motives to total savings. We also emphasize the importance of accounting for state-contingent assets when analyzing the precautionary saving motive

Accounting for Social Security claiming behavior

Why do most individuals claim Social Security benefits before the full retirement age? Claiming benefits early results in a substantial reduction in pension income, yet many people claim as early as possible (age 62) or soon thereafter. We argue that by answering this question, we can make two additional contributions to the literature. First, early claiming is equivalent to low demand for Social Security annuity, thus it offers a unique context for studying the well-known annuity puzzle. Since participation in Social Security is nearly universal, the low demand for this annuity cannot be explained away by market failures. Second, we show that claiming decisions are closely linked to the subjective rate of time preferences and thus can provide a new angle for the identification of this parameter. We provide a quantitative analysis of claiming decisions using a rich structural life-cycle model that matches many important features of the data. We find that the claiming puzzle can be attributed to a combination of three factors: (i) the discrepancy between individuals' subjective valuation of Social Security annuity and its implicit price, (ii) strong bequest motives, (iii) pre-annuitized wealth. We show that if individuals were rewarded for delaying claiming not with additional annuity income but with equivalent (in present value terms) lump-sum payments, the fraction of early claimers would be significantly reduced

Medical Spending in the US: Facts from the Medical Expenditure Panel Survey Data Set

We document facts about medical spending of the US population using the Medical Expenditure Panel Survey dataset. We find that for the entire population, around 44% of the total medical spending is paid by private insurance but there is a substantial difference in terms of financing medical care by age: for working age adults (25 to 65 years old) private insurance covers around 57% of the total medical spending, whereas for the elderly (older than 65 years old) the largest payor is the government which covers 65% of the total. Inpatient hospital care accounts for a third of the aggregate medical expenditures. Medical spending is highly concentrated: the top 5% of spenders account for more than half of the total expenditure. Even higher concentration is observed among hospital spending where the top 5% of spenders contribute around 80% to the total expenditure. The concentration in medical spending decreases with age: the Gini coefficient of the total medical spending is 0.75 for people aged between 25 and 64 years old and 0.63 for people older than 65 years old. We find that average medical spending of people in the bottom income quintile is higher than that of people in the top income quintile for all age groups. In terms of persistence of medical spending, we find that the correlation of medical expenditure in two consecutive years is 0.36. When persistence is measured by quintile of medical spending distribution, medical spending of people in the bottom and top quintiles has higher persistence relative to other groups.JEL Classification Codes: D12, D14, I13, I14http://www.grips.ac.jp/list/jp/facultyinfo/porapakkarm-ponpoje